A DYNAMIC PERFORMANCE MANAGEMENT MODEL
 FOR LOCAL COUNCILS

ASSOC. PROF. DR. JAMIL HAMALI
DR. NAGARAJAH LEE
DR. VOON BOO HO
University Teknologi MARA
Sarawak, Kampus Kota Samarahan  

INTRODUCTION

High performance is an essential factor in determining the survival of an organization in this dynamic and competitive environment. Investment in capital and fixed assets no longer guarantees the success of the organization in this information era if they are not efficiently managed. Thus, one of the ingredients in the success of an organization is how efficiently the organization learns to adapt itself to the environment and capitalizes its resources fully. In achieving this, human resources play a vital role. Therefore for an organization to be successful, its employees need to be continuously motivated and a positive performance culture needs to be created within the organization.

Performance can only be managed and measured effectively if the performance management system is in sync with the organizational goals. As described by Costello (1994) and Isaac (2000), the performance management system used should support the organization’s goals by linking the work of each individual employee to the overall mission of the work unit. Unfortunately, performance management has long been confused with the annual appraisal where in reality, the appraisal is only one component of a performance management system. Since the reward system of most organizations is closely linked with the performance appraisal, this has overshadowed the bigger picture of performance management. Hence, the notion that performance management goes beyond the annual appraisal needs to be built into the value system of everyone in the organization to overcome the prejudice and resistance to performance management and measurement. With this objective, the writer proposes a framework for developing a dynamic performance management model that could be used to effectively manage the performance of local councils.  

THE CONCEPT OF PERFORMANCE MANAGEMENT

According to Fletcher and Williams (1993), the most common view of performance management is creating a shared vision of the purpose and aims of the organization and helping individual employees to understand and recognize their role in achieving these goals. Other authors like Edis (1995) as cited in Isaac (2000) also supported this view. Tracey Weiss in her book ‘Performance Management: Breakthrough in Achieving Strategy Through People’ defines the ‘vision’ of performance management as “a process for establishing a shared understanding about what is to be achieved, and how it is to be achieved, and an approach to managing people that increases probability of achieving success“ (Weiss, 1997,p.3). Therefore, performance management can be regarded as a process of managing the people in the organization and aligning the management of other resources in the direction that could increase the probability of improving the performance of both the individual employees and the organization as a whole.

Palan (2002), classified performance management into three major perspectives: a) managing organizational performance, b) managing employee performance, and  c) integrating the management of organizational and employee performance. In describing the process of performance management, Bedrup (1995), emphasizes that to manage organizational performance, the performance management system must comprise three main processes: planning, improving, and reviewing. In elaborating on this model, William (1998) reiterated that in the planning stage, the concern is with formulating the organization’s vision and strategy and defining the performance target while at the performance review stage, the focus is on performance measurement and evaluation. Finally, the improvement stage takes into consideration the process that includes business process re-engineering, continuous process improvement, benchmarking, and total quality management, thus getting more feedback and action. Even though the performance management system involves three different stages, they are not distinctly isolated from one another but are dynamically interrelated.

            Regarding the perspective on performance management as a system for managing employee performance, several models have been proposed. Among the notable ones is that of Ainsworth and Smith (1993), where the performance management is seen as a three-step cycle consisting of planning, assessment and feedback. In this model, performance planning is concerned with activities such as formulating the organizations and strategies, and defining performance either by the performance target of critical success factors. Performance assessment takes into consideration the monitoring aspect which embraces performance measurement and evaluation and the feedback component stresses activities such as continuous process improvement and business process reengineering. These views are supported by other authors such as Guinn (1987) who also proposed a three-step performance management process involving planning, managing and appraising. While, Torrington and Hall (1995) suggest that an effective performance management system for managing employee performance should consist of three main components which are planning, supporting and reviewing performance respectively. The common features of the performance management models advocated by these authors are shared views on expectations, constant monitoring and assessment, and fair evaluation and feedback as a developmental process.

            Some authors do not view performance management as separate systems for either managing organizational performance or employee performance but rather as an interrelated system. This view espouses the idea of performance management as an integrated system where employee performance is interlinked with organizational performance in a holistic manner. McAfee and Champagne (1993), described performance management as a cycle consisting of three stages: planning performance, managing performance, and appraising performance. The planning stage is based on the organizational goals and standards where the main activities are establishing performance goals, developmental goals and action plans. In the managing performance stage, effort and goal accomplishment are observed and documented thus the focus is towards people aspects. Feedback, coaching and counseling is provided based on observation and documentation.  Finally, at the performance appraisal stage, employees are evaluated based on the accomplishment of the predetermined goals, the alignment between the organizational goals and employees’ goal dispositions. This model is concerned with improving the employee which will result in improved organizational performance.  

THE BALANCED SCORECARD AS A PERFORMANCE

MANAGEMENT SYSTEM 

The Balanced Scorecard, a comprehensive framework for organizations to manage their performance, was developed by Kaplan and Norton (Kaplan & Norton, 1996). It was argued that for an organization to remain competitive, the outcome measures alone are not sufficient. In profit oriented organizations, the financial aspects must be complemented with other soft aspects such as stakeholders’ satisfaction, effective internal processes, technology, and innovation. In other words, besides measuring the outcomes of the business process (which is a lag indicator), organizations also need to identify the key success factors, the lead indicators that will signal ‘future outcomes’. As a strategic performance management system, the Balanced Scorecard is a tool for organizations to transform their visions and strategies into measurable variables which can be used to monitor and manage the organization’s performance.

The Balanced Scorecard as a framework for strategic performance management is summarized in Figure 1

The balanced scorecard translates an organization’s vision and strategy into tangible objectives and measures. There is a balance between external measures for shareholders and customers and internal measures for processes, innovation, and learning and growth. The generic framework of how an organization’s strategies are translated into measurable objectives and measures is shown in Figure 2

Figure 2: Balanced Scorecard Components (Kaplan and Norton, 1996,: 9)

Hence, an organization can look at its performance from four perspectives, namely customer perspective, internal process perspective, learning and growth perspective, and financial perspective. The application of the balanced scorecard as a performance management system had begun since the introduction of this concept by Kaplan and Norton in 1992. Ever since then the balanced scorecard has been widely used by many organizations. Among the first few companies that used the balanced scorecard as their strategic management tools were Mobil Oil Corporation, CIGNA Corporation, Chemical Retail Bank, and Brown and Root Energy Services, Rockwater Division (Norton & Kaplan, 2001, p. 5). The use of the balanced scorecard had gained popularity in the North American Region and it is picking up momentum in Europe.

            Much research has been done in evaluating how the balanced scorecard could be used in enhancing organizational performance. In a study on developing a consistent performance management system for Finnish companies, Malmi (2000) found that the companies surveyed used the balanced scorecard to serve two different purposes. Some companies used the balanced scorecard as an approach for management by objective where the scorecard is used as a guide for formulating strategies and action plans, while some use the scorecard merely as an information system.

It was found that the main constraint faced by the management in integrating the scorecard in their strategic management process was a lack of knowledge about the balanced scorecard concept. The main limitation faced by the researchers in the attempt to introduce the balanced scorecard as a management tool was that the idea of linking measures together based on assumed cause effect relationships was not really understood by the early adopters. Therefore, they found difficulty in linking the measures in the scorecard and directing them towards achieving the companies’ vision hence they had little confidence in the scorecard. However with the passage of time the representatives of all the surveyed companies were of the opinion that the implementation of the balanced scorecard had actually improved performance.

Even though the balanced scorecard was initially developed for profit oriented organizations where the ultimate purpose of the scorecard is to enhance the financial performance by improving the other three perspectives, its use in enhancing the performance of non-profit organizations could not be denied.  In a study of the use of the balanced scorecard in local government, Kloot & Martin (2000), addressed two important issues:  

1.      how balanced performance management systems are developed and integrated within local government organizations for managerial and accountability purposes, and

2.      can a balanced model of effective performance management for Australian local government be developed.

Using a qualitative method such interviewing the councilors, CEOs, executive directors, and managers from various government organizations, they concluded that a comprehensive model such as the balanced scorecard could help the organization to clarify and translate the vision and strategy into action. It was also found that, even though a fully integrated performance management system could not be developed for public institutions where the ultimate focus is not financial, the implementation of the balanced scorecard concept helps the organization improve their performance.

 Studies have also been carried out to formulate frameworks for implementing the balanced scorecard concepts in various organizations.  Wijn and van Veen-Dirks (2002), on studying the relationship between the critical success factors (CSFs) and the balanced scorecard, developed a framework for how to implement the balanced scorecard as strategic management tool. Through a six-year research project involving 15 companies in the Netherlands, they proposed a framework where the strategies are derived according to market needs and CSFs were identified for each strategy. The balanced scorecard is later developed based on the CSFs and the scorecard functions as a strategic management system.  

LIMITATIONS OF THE BALANCED SCORECARD

Even though the balanced scorecard concept gained popularity, it did not escape from criticism. One of the major limitations of the balanced scorecard is that it assumes the relationship between the various perspectives to be linear. This is evident from the cause-effect relationship that Kaplan and Norton described in explaining how the different perspectives are related to one another. The following quotation is an example of the relationship assumed in integrating the scorecard in management practices. 

“If we increase employee training, they will become more knowledgeable about the full range of products they sell; if the employees are more knowledgeable about the products, then their sales effectiveness will improve. If their sales effectiveness improves, then the average margins of the products they sell will increase” (Kaplan, 1996 :149)           

In the actual situation, the relationships between the various perspectives of the balanced scorecard are not linear.  In some cases the existence of the causal relationship between the perspectives was also questioned (Norreklit, 2000). She further argues that Kaplan and Norton’s claim of a causal chain of non-financial measurements that is created by the balanced scorecard is invalid; stating that what exist is a logical relationship rather than a causal one.

            Apart from that, the balanced scorecard does not give much emphasis on the dimension of time. It cannot be denied that in certain circumstances the cause and effect relationship exists after a time lag. Unfortunately the balanced scorecard does not have features to address this situation and further more the balanced scorecard is a tool to measure cause - effect relationships at the same instance.

            The balanced scorecard also does not have a mechanism for defining the relevance measures that need to be included in the scorecard. According to McKenzie (1998), determining the performance measures is often more difficult than expected. In order to arrive at a good set of measures, managers need to focus on the cause effect relationships in strategy in order to link measurement with strategy. Managers often understand the link between customer satisfaction, employee satisfaction and financial performance, but the scorecard does not provide guidance as to how to improve performance to achieve the desired strategic results (Morgan, 1998 as cited in Gautreau & Kleiner, 2001:154). In overcoming this complexity, most of the time, managers reduce the list of possible measures to a manageable set.  Hence, relying on these few measures, managers hope to use the scorecard as a strategic performance management tool.   However this could pose significant threats if the right measures were not included in the scorecard.  

DEVELOPING A PERFORMANCE MANAGEMENT SYSTEM USING THE SYSTEMS APPROACH

An organization will enjoy a sustained performance only if it creates a performance culture among its employees. This is only possible when the performance management system is tailored to the organization so that it will align itself to the organization’s culture. A local perspective on the organization, such as the context in which it exists, need to be integrated with the generic principles of performance management so that the effectiveness of its implementation is optimal. According to Weiss (2000), while performance management programs need to be tailored to individual cultures and business strategies, the system must have six fundamental characteristics that are:

1. Performance management must be an ongoing system of planning, coaching, reviewing, and rewarding.

2. Performance management needs to be linked to specific business objectives and driven by top management.     

3. Performance measures are based on quantifiable objectives and behavioral competencies.

4. Management commitment and accountability must exist at all levels.

5. There must be links to other systems and goals must be communicated clearly.

6. Multiple sources must provide access for input into performance reviews.

The balanced scorecard introduced by Kaplan and Norton has all the above-mentioned features hence could be used as an effective performance management system. However, the major drawback of the scorecard is the linear nature of cause-effect relationships. The scorecard only emphasizes one-way thinking, and furthermore the bubble diagrams suggested by Kaplan as a mapping of the cause-effect relationships between the four perspectives could not create reliable mental simulations that could help management to visualize the interrelationships between the enormous number of variables involved in the scorecard.

            The uni-directional flow design has a profound deficiency in its conceptualization of the whole performance management concept and process. Without including feedback (two-way effect) and time delays it is very difficult to design a ‘balanced scorecard’ that provides an effective representation of the organization. In other words, the elements of the scorecard, including the cause-effect relationships between measures, may be based at times on mere guesswork rather than a sound understanding of the dynamics of the system (Todd, 2000).

            In addressing this problem, the system thinking feedback concept could be of great assistance. The System Dynamics Modeling technique can be combined with the Balanced Scorecard principles to develop a dynamic scorecard that could alleviate the deficiencies caused by the linear relationship mode in the scorecard. Wolstenhome (1999), stated that there is a trend in the development of the dynamic scorecards where System Dynamics plays a vital role.

            The dynamic scorecard concept takes the framework of the balanced scorecard proposed by Kaplan and integrates it with the system dynamic modeling technique. The design of the scorecard is based on the systems based notions of relationships; the feedback concept is translated into a stock and flow diagram, which acts as the platform and communication medium (Todd, 2000). The system dynamics modeling which employs the stock, flow converter and connector elements enhance the ‘visual communication’ that the scorecard could provide otherwise into computer simulations with ‘real time’ features. The inclusion of delay in the structure of the dynamic model enhances the ability of the scorecard in identifying the ‘correct’ lead measures. The stock and flow infrastructure also enables various weights to be assigned to the measures, giving the flexibility to the model to be suited to various environments.

METHODOLOGY 

The focus group interviews were used to elicit information on the core functions of the local councils. The interview involves representative from three local councils, Majlis Perbandaran Padawan, Dewan Bandaraya Kuching Utara, and Majlis Bandaran Kuching Selatan. 

The follow questions were used in moderating the focus group interviews: 

1)                  What are the core activities of the local council?

2)                  How do you perceived the performance of the local council in general?

3)                  How does the council go about measuring and monitoring its performance?

4)                  What are the key indicators used by the councils to assess its’ performance on the following perspectives: financial, internal process, customers, and learning and growth.

5)                  What are the major challenges faced by the council?

The outcome of the focus group interviews was transcribed and the information is used in determining the variables for the performance management framework. 

RESULT 

The systems perspective offers a more holistic and integrated approach where the various components of the performance determinants, termed the perspectives (financial, customers, internal process, and innovation and growth), in the balanced scorecard are strongly linked with one another and the dynamic complexity of the relationship is appreciated.  Based on the focus group interviews, a dynamic performance management model consisting of the various performance determinants and their association with the organization’s overall performance is  developed by adapting the modified version of the balanced scorecard discussed earlier in this paper. The dynamic scorecard model is shown in Figure 3. 

 Figure 3: A dynamic performance management model (adapted and modified by the writer using the balanced scorecard perspectives as performance determinants)

The relationships between the components in the proposed performance management model are not hierarchical but iterative in nature. This makes the interrelationship between the components dynamic and they can be adjusted to fit into the context where this model will be used. In this model the perspectives of the balanced scorecard -  customer perspective, internal process, and learning and growth -  function as the performance determinants that influence the overall organization performance. A brief explanation of the dynamic behavior of the variable could be similar to the one described below:  

“Customers’ satisfaction increases the demand for the service provided which is associated with customer acquisition and resource allocation. The quality of the service provided depends on the resources and the ‘knowledge level’ of the staff. The training programs are designed to increase the skill and the knowledge of the staff, which will contribute positively to productivity. The productivity increases the delivery of the service hence reduces the waiting time and increases customers’ satisfaction level whereby this will increase the demand for the services and the iteration continues”.

The relationships between the various variables in this model display great dynamic complexity, which is the feature of the dynamic model that enables it to represent real management problems more realistically. Since the variables in this model behave in an interactive manner, it eliminates the ‘one size fits all’ problem that has become the major drawback of most performance management systems. However, for this model to be effective the performance management concepts need to be communicated to the employees before they are implemented. 

CONCLUSIONS 

It cannot be denied that investigating all the cause effect interactions between many interrelated aspects of the performance management of an organization can be a difficult task. It becomes even more cumbersome if the model is to be used in a turbulent environment. However, the process of qualitative mapping using influential diagrams, as mention by Checkland (1999), and quantitative modeling using causal loop diagrams with the assistance of simulation software like Vensim and Stella will definitely throw some light in the development and implementation of the dynamic performance management system. These tools can reveal, at the policy design and reformulation stage, the likely behavior of the system and allow room for further improvement of the system.

Thus, it can be a breakthrough for developing a more effective performance system for the organization. Even though the framework of performance management using the systems approach suggested in this article cannot not offer a panacea for performance management woes in the public institutions, it certainly could provide a vehicle for deeper understanding of the organizational structure and dynamics of creating a performance management system that best suits the organization.